Canadian National Railway Company (TSX: CNR) is engaged in the transportation business and transports essentials like natural resources, manufactured products, and finished goods across the North America region. The group operates through a 18,600-mile rail network connecting Canada’s Eastern and Western coasts with the U.S.

Key Updates:

• Strong Operational Fluidity: In Q1FY22, the company retained its growth from the operating metrics such as car velocity, workload and through network train speed. This is encouraging considering the recent severe winter weather conditions and supply chain disruptions. During Q1FY22, the group reported growing demand from merchandise segment, consumer products and bulk products. Meanwhile, the management is positive on its upcoming operations and expect strong demand to persist in the second half of FY22.

 Source: Company Report 

• Sign of Revival: The company reported a higher freight revenue in the first quarter of FY22 at CAD 3,608 million, which is higher than CAD 3,423 million in pcp. this was primarily driven by higher traction from Petroleum and chemicals (up 14% y-o-y), metals & minerals (10%) and growth from intermodal segment (grew 9% y-o-y). Apart from this coal and automotive segment also reported impressive performance, which contributed to the above growth.

Source: Company Report

• Filed Shelf Prospectus worth CAD 6 billion: On 5 May 2022, CN has filed a shelf prospectus with Canadian securities regulators and SEC, under which the company can issue debt securities of worth CAD 6.0 billion in Canadian and US Markets. The company intends to use net proceeds of debt securities for corporate purpose, share repurchase and acquisitions.

• Robust Profitability margins: For Q1FY22, the company reported its EBITDA margin and operating margin of 44.4% and 33.1%, respectively, significantly higher than the industry median of 22.3% and 11.1%, respectively. Net margin was recorded at 24.8% in Q1FY22, as compared to the industry median of 11.4%. These indicates that the company has a better cost management when compared to the industry median.

• Announced Q2 FY22 Dividend: The company announced Q2 FY22 dividend amount of CAD 0.7325 per common share, which will be paid on June 30, 2022.

Risk associated with the investment:

The company’s operations might be hindered due to several factors such as restrictions in logistic due to adverse weather conditions, lower productivity across the agricultural and consumer products, rising fuel expenses etc.

Q1FY22 Financial Highlights: (Million in CAD)

Q1FY22 Income Statement Highlights (Source: Company Report)

• CNR declared its first quarter FY22 result, wherein the group reported revenues of CAD 3,708 million, v/s CAD 3,535 million in the previous corresponding period (pcp). The growth was supported by higher freight revenues.
• Total operating expenses stood higher at CAD 2,481 million, v/s CAD 2,208 million in pcp. The decline in expenses was primarily due to lower Labor and fringe benefits costs, and a decline in Purchased services and material expenses, partially offset by increase in Fuel expenses. Hence, operating income slide to CAD 1,227 million from CAD 1,327 million in pcp.
• The company reported a net income of CAD 918 million, fell from CAD 976 million in pcp, primarily due to a lower operating income as mentioned above, partially offset by a lower income tax expense.
  

  Valuation Methodology (Illustrative): EV to Sales Based

Analysis By Kalkine Group

Stock Recommendation:

Despite several headwinds, the company ended the quarter on a positive note and reported freight revenue per carload of CAD 2,681 in Q1FY22, higher than CAD 2,392 in pcp . Notably, free cash flow surged to CAD 571 million in Q1FY22 from CAD 539 million in pcp, which is encouraging. For FY22, the company expects to deliver a 15% to 20% growth in adjusted diluted EPS while the management is targeting to achieve a free cash flow in between CAD 3.7 billion to CAD 4.0 billion.

We have valued the stock using the EV to Sales based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Union Pacific Corp, Canadian Pacific Railway Ltd etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of CNR at the last closing price of CAD 151.86 on May 05, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Price Chart (as on May 05, 2022). Source: Refinitiv (Thomson Reuters)

*The reference data in this report has been partly sourced from REFINITIV

  Technical Analysis Summary

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.